"For the times they are a-changin."
-- Bob Dylan, from the 1964 album The Times They Are a-Changin'
In a now infamous quote, Netflix's (NASDAQ:NFLX) chief content officer Ted Sarandos once said, "The goal is to become HBO faster than HBO can become us." Now, with more than 125 million subscribers worldwide and its growth accelerating, it appears Netflix has achieved the ambitious goal it laid out more than five years ago.
In a plot twist worthy of one of HBO's primetime dramas, John Stankey, the AT&T (NYSE:T) exec charged with overseeing Warner Media, says that HBO will have to become more like Netflix in order to thrive in the fast-evolving media landscape.
The ink is barely dry ...
The crown jewel of the merger between AT&T and Time Warner is HBO. The cable channel had long been known for the quality of its award-winning programming, producing such groundbreaking hits as The Sopranos and The Wire, and more recently Westworld and Game of Thrones. Its focus on excellence has led to an unmatched stream of accolades, achieving the most Emmy nominations for a network every season for the past 17 consecutive years.
Now, less than a month after the completion of the deal, AT&T is going back on its pledge not to interfere with HBO, and planning to make big changes at the cable channel. During a town hall-style meeting with employees of HBO, Stankey said, according to The New York Times: "It's going to be a tough year. It's going to be a lot of work to alter and change direction a little bit."
The executive took great pains to never actually mention Netflix by name, but the inference was all too clear when Stankey said that HBO needed to become more like its streaming competitors in order to prosper, in light of changing consumer behavior. He also said that the $6 billion in profits HBO booked last year was "not enough."
The bigger picture
This revelation follows statements from Stankey last month that HBO would be getting a bigger programming budget as part of the new order of things. "I fully expect we're going to be investing heavier in content development at HBO," Stankey said in an interview with Bloomberg.
HBO had a budget of about $2.5 billion in 2017 but was being massively outspent by its streaming colleagues. Netflix paid $6 billion on its original movies and TV shows last year, while Amazon laid out $4.5 billion. Netflix has since predicted it will spend between $7.5 billion and $8 billion on content in 2018.
Stankey is hoping that HBO can increase its output without necessarily sacrificing quality, with the overriding objective of attracting more eyeballs: "We need hours a day ... It's not hours a week, and it's not hours a month. We need hours a day. You are competing with devices that sit in people's hands that capture their attention every 15 minutes," he said, referring to the proliferation of mobile devices.
HBO is planning to take another page from the Netflix playbook to help make the transition to the new media paradigm. Stankey said the company needed "more hours of engagement." He explained: "You get more data and information about a customer that then allows you to do things like monetize through alternate models of advertising as well as subscriptions, which I think is very important to play in tomorrow's world."
If you can't beat 'em, join 'em
If that strategy sounds familiar, it should. Netflix has long used its treasure trove of subscriber data to make decisions about what programs to green-light and how much to spend. That data, combined with its heavy spending on programming, has caused the streaming giant's customer growth to accelerate -- it recently topped 125 million subscribers, within reach of HBO's 142 million worldwide. At the rate at which the company has been gaining customers, Netflix should eclipse HBO's total before the year is out.
The adoption rate of streaming over the past decade has been nothing less than stunning. HBO debuted its own streaming service about three years ago, with then-CEO Richard Plepler saying that streaming "is a large and growing opportunity that can no longer be ignored."
Now we'll have to wait and see if HBO can become Netflix.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of AMZN and Netflix. The Motley Fool owns shares of and recommends AMZN and Netflix. The Motley Fool has a disclosure policy.